5 reasons Congress and Trump are struggling with tax reform

The administration's goal of getting a tax reform to Trump’s desk by the end of August is now considered “highly aggressive to not realistic,” Treasury Secretary Steven Mnuchin told The Financial Times.
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President Trump said a tax reform plan was imminent in February, but there is still no plan.(Photo: Getty Images file)

A tax reform plan was supposedly imminent when President Trump met with airline executives at the White House on Feb. 9.

“We're way ahead of schedule,” Trump said then. “We're going to be announcing something, I would say, over the next two or three weeks that will be phenomenal in terms of tax.”

Nearly 10 weeks later, Trump told a crowd in Wisconsin on Tuesday a plan was “coming along very well” and would be out “very soon.” But the administration's goal of getting a bill to Trump’s desk by the end of August is now considered “highly aggressive to not realistic,” Treasury Secretary Steven Mnuchin told The Financial Times, and members of Congress say final action may not happen until the end of the year, if it happens at all.

Here’s a look at five hurdles that still stand in the way

Unclear goals

A House GOP “blueprint” for reform would overhaul both individual and corporate rates, and so would a less-detailed plan that Trump unveiled during the campaign. Trump’s plan would have significantly increased the deficit, while the House plan was “revenue neutral,” meaning that after rates were cut and deductions and credits were eliminated, the government would still receive the same amount of money.

At the same time, Trump has talked about tax reform being a way to fund a $1 trillion infrastructure program.

So before a bill can be written, the players need to agree whether the end result lowers the deficit, keeps it the same, or increases it.

“Tax cuts don’t pay for things, tax increases pay for things,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

MacGuineas said taxes could be increased for some people at the same time rates are lowered by trimming some of the $1.6 trillion worth of deductions and credits built into the code. It is also possible to trim credits and deductions so that some of the money is used for lower rates and some for increased spending for infrastructure.

Congress and Trump could also just agree to do both: cut tax rates and spend money on infrastructure, and don't worry about increasing the deficit. MacGuineas called this a “devil’s bargain” that would reduce or eliminate any economic growth from cutting taxes.

A lobbyist for every loophole

Eliminating tax deductions and credits is easy to talk about but difficult to do because each one has a coalition in Congress or an interest group or industry fighting to keep it there.

For individuals, the House GOP blueprint would eliminate nearly all personal deductions and credits and replace them with a significantly increased standard deduction and flatter, lower tax brackets. Instead of taking the standard deduction, people could choose to deduct mortgage interest and charitable contributions.

Reducing the tax benefits for making donations to charity would stir up religious groups, however. And eliminating or reducing the benefit of owning rather than renting a home by changing the mortgage interest deduction would be vigorously opposed by powerful lobbies for home builders and realtors.

“We need to maintain these important tax deductions,” said Bill Brown, president of the National Association of Realtors. “We will flex our political muscle to make this successful, be it supporting existing legislators who support our position, or going actively against legislators who are against this.”

Opposition could also unite lawmakers from some regions, regardless of party. Eliminating an existing deduction for state and local taxes, for example, would mean taxpayers in states with high state income or property taxes, such as California, New York and New Jersey, would get a much smaller benefit, if any, from an increased standard deduction and lower rates.

“I have to protect New Jersey and I'm going to do that,” Rep. Bill Pascrell, D-N.J., a Ways and Means committee member.

Border adjustment

The House Ways and Means Committee may have a hearing next week on “border adjustment,” a change to corporate taxes that is a key piece of a “blueprint” unveiled in June by the House GOP because it is expected to raise $1 trillion to offset lost revenue from lowering corporate rates.

Border adjustment tries to improve the ability of American companies to compete globally by effectively adding a tax to imported goods that is not imposed on domestic products. It has been the target of an aggressive campaign by retailers and some conservative advocacy groups — including TV ads aimed at Republicans on the Ways and Means Committee — that warn that consumers would have to pay more.

The notion of border adjustment has received a cold reception in the Senate, and Trump has given conflicting comments about it. Without it, however, making a dramatic cut in corporate rates becomes much more difficult.

Health care memories

While Trump says work on a health insurance overhaul continues, the ongoing struggle to pass a bill in the House could make lawmakers gun-shy about making tough choices on tax reform if they believe those choices will be bargained away in later negotiations in the Senate.

Rep. Kevin Brady, R-Texas, chairman of the Ways and Means Committee, has said he wants to get a bill out of committee this spring. Yet the same difficulties that plagued the health care bill, with members rankled about having a finished plan presented to them for acceptance or rejection, could reoccur with a tax bill.

To avoid that, there needs to be coordination that has not yet taken place.

“I welcome the president taking a lead,” Brady told reporters last month. “I think absent his leadership and House and Senate Republicans unifying behind the plan, that tax reform would be nearly impossible to achieve.”

Activated Democratic base

Ways and Means Democrats held their first closed-door meeting with Brady on the GOP blueprint earlier this month, and they left agreeing to look at areas where they could work on together.

But a major motivation for tax reform is the desire of Trump and the Republican-controlled Congress to have a significant legislative accomplishment — something an activated Democratic base could demand their representatives resist.

Senate Minority Leader Chuck Schumer, D-N.Y., has already hinted at a Democratic stalling tactic, saying Trump should release his tax returns before anything is enacted so lawmakers can be assured he is not using reform to enrich himself.